Bernard Madoff will remain free on bail – but still under house arrest – after a judge yesterday rejected a motion to jail the accused Ponzi schemer because he recently mailed relatives more than $1 million worth of watches and other valuables.

Federal Magistrate Judge Ronald Ellis rejected prosecutors’ arguments that allowing Madoff, 70, to continue his $10 million bail would give him the chance to hide other assets, and that he is a flight risk.

Ellis soon after stayed his order until 1 p.m. tomorrow so prosecutors could file a planned appeal of his decision to a Manhattan federal court judge.

In their bid to jail Madoff, prosecutors disclosed that his office desk contained $173 million worth of checks that he had signed and planned to give relatives, employees and others when he was busted Dec. 11.

But that and Madoff’s Christmastime mailing of the watches failed to sway Ellis.

Legal experts said it was difficult for the government to convince the judge Madoff might flee.

“The guy is on electronic monitoring, he has a guard watching him every day, and the press is watching his every move,” said Daniel Margolis, a lawyer and former federal prosecutor.

“So fleeing the country . . . would require an escape plan of cinematic proportions.”

Madoff will remain under house arrest in his Upper East Side penthouse while awaiting trial. He is monitored by an electronic device and 24-hour guards paid for by his wife, Ruth.

Ellis’ decision came as a slap to Madoff’s alleged victims, who may have lost up to $50 billion in the purported scam at his investment firm.

“We’re also struck by the unfairness of his remaining in a luxury apartment while many of our clients are struggling to remain in their homes,” said Brad Friedman, a lawyer for Madoff victims.

But Ellis yesterday imposed new bail conditions on Madoff, including that he “compile an inventory of all valuable, portable items” in his home.

The security firm guarding him must check the inventory against the contents of his residence every two weeks, and must search “all outgoing physical mail to ensure that no object has been transferred,” Ellis said.

Madoff’s bail agreement now also will bar him and Ruth from disbursing any assets – just as already mandated by a prior judicial order and pact.